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Senate Sends in Clowns on Oil M&As

The Senate Judiciary Committee, chaired by Sen. Arlen Specter,
recently swore in CEOs of six major oil companies to answer
allegations that mergers and acquisitions in the sector have let
them manipulate gasoline prices and gouge consumers.

The alleged purpose of the hearing was to gather testimony on
legislation introduced by Specter that would once again ask if oil
company mergers had resulted in too little competition and too much
market power. The legislation also would amend antitrust statutes
to make oil companies prove mergers are in the public interest.

The spectacle that followed demonstrates why no thinking,
intelligent man or woman can have anything but the most abiding
contempt for the business of politics in a participatory
democracy.

The charges levied by the committee are ridiculously easy to
dismiss. For the most part, retail gasoline prices are a function
of the price of crude oil in world markets, as
Figure 1 illustrates.

World crude-oil prices are established in various spot markets
around the world in which those with some excess crude sell to
those who are a little short. Those actors - and there are
thousands engaged in those markets every day-are the true “price
setters.”

In short, “Big Oil” does not set prices; consumers’ willingness
to pay determines the pricing, investment and entry decisions of
“Big Oil.” This is true not only in world crude markets, but also
in retail gasoline markets. Vertically integrated oil companies
typically sell gasoline to their franchise service stations at
prices that are contractually linked to spot market prices.

The mergers and acquisitions in the oil sector are part of an
interesting story, but not the one being told by the committee.
Independent companies disappeared over the past several decades
because they were not particularly profitable and couldn’t
survive.

Analysts at Goldman Sachs report that returns on investment
capital in the oil and gas sector were less than those of the U.S.
economy from 1970-2003. As
Figure 2 suggests, the industry became more concentrated
because there were not enough profits available to sustain a larger
number of companies.

A great number of studies have been undertaken to evaluate the
effect of those mergers on retail gasoline prices. Most of them
have found no effect Only two, to our knowledge, have found to the
contrary.

In the first study, the Government Accountability Office
published a 2003 study concluding that in six of eight cases,
retail gasoline prices increased an average of 1-2 cents a gallon
as a result of those mergers. In the second study, economists
Nicholas Oxedine and Michael Ward at the University of Texas
conclude that mergers since 1990 have increased pump prices by
0.6%-1.2%.

Both studies are problematic. The GAO study has been criticized
by the Federal Trade Commission for questionable methodological
assumptions and practices. Oxedine and Ward concede that their
study is incapable of distinguishing between mergers that create
more efficient (albeit higher) prices and mergers that produce
market power and correspondingly inefficient prices.

Regardless, even if the studies were methodologically flawless,
the effect on consumers (I cent a gallon) is trivial. How then to
explain the gibberish on display at the Senate hearing last
week?

Only two conclusions are possible. First, the senators on the
committee might be unfamiliar with the economic literature
pertaining to oil markets and the insights it provides. But many
experts have made similar arguments over the last 30years, and the
congressional idiocy does not dissipate with time.

This suggests another conclusion: Committee members don’t care
about economic facts or logic. All they care about is scoring
points with swing voters who have a deep-seated religious belief
that price increases at the pump are always and forever
manifestations of some corporate conspiracy. Pandering to the
lowest common intellectual denominator is the name of the political
game.